4.2 Poverty + inequality

Absolute poverty

When income is below the threshold of $2 per day(measured by PPP) to access the most basic, life sustaining goods + services. food, water, shelter

Relative poverty

Earning less than a particular percentage of a country’s average income.

In the UK, this percentage is 60%, in Australia, it’s 50%.

Equity vs inequality

Equity: Fair distribution of income

-horizontal equity: Those with the same incomes are taxed the same.

-vertical equity: higher income earners pay higher taxes.

Equality: equal distribution of income

Causes of poverty

ABSOLUTE

Unemployment: Cyclical- lack of AD in economy, workers lose jobs+income. Structural- lack skill for higher paying jobs, lose jobs+income.

Increased pop + density: strain on resources, higher prices and lower supply, less disposable income to spend on basic needs

RELATIVE

Poor health/ healthcare + access: limits productivity, increased spending on health so less to spend on basic needs, less earning potential,

Poor education/ skills + access: limits productivity, limits earning potential, limits the kind of jobs people can take

Tax cuts for high income earners: more disposable income, increased divide between rich + poor

Income

The flow of money received each year.

Salary, interest earned on cash in the bank, benefit payments

Income inequality

The uneven distribution of income among individuals or households.

Lorenze curve

Measures income inequality across countries.

-the closer a country’s Lorenz curve is to the 45° line of perfect equality, the more equal its incomes are.

Gini coefficient

As Gini coefficient increases, income inequality increases.

-always between 0 and 1 where 0=perfect income equality and 1=total income inequality

Wealth

Stock of all your assets added up.

-house, car, shares, stocks, etc.

Wealth inequality

When wealth is distributed unequally between a population.

Causes of income+wealth inequality

within a country vs between countries

Experience: more skills gained over time→more experience→demand higher wages→earn higher income→accumulate more wealth over time

Differences in education: the more qualifications someone has, the greater the earning potential→higher income

Taxation policy: low income earners taxed a higher % of income + vice versa for high income→ increase + wealth gap between diff groups.

Between countries:

Globalisation: offshored + outsourced countries earn less and profits go back to AC’s, CA in one country.

Geopolitical factors: war, conflict, political instability, hinder development.

Policies to reduce income+wealth inequality

Taxation: ↑ progressive tax and ↓ regressive tax→ taxing rich more and poor less→poorer get more disposable income.

Laffer curve- Incentive to earn higher incomes decrease→less tax revenue by gov.

Reduced regressive taxes means large reduction in tax. revenue by gov.

Increase benefits: benefits (e.g. unemployment, child support)given to those on lower incomes to increase their incomes.

More incentive to stay on benefits + not find work- strain on public finances.

Higher gov. spending→budget deficit

Gov. spending on education/ training + healthcare: more skills/ better health→increase productivity→higher wages+incomes

High gov. spending→budget deficit. Long time to take an effect.

Capitalist

People who own and use the factors of production in the hope of making money or profit.

Capitalism

An economy with capitalists in it.

-thrives best in free economies as all factors of production are allocated by the price mechanism, not the state.

How does capitalism limit economic growth

When workers have low wages, they will not have enough money to invest in the economy. This will therefore hold back AD and limit growth.

If capitalists save their wealth, then there is a leakage from the circular flow of income. It will also mean less investment or consumption, so AD will not shift out as far as it could. So workers don’t see the increase in living standards(due to leakage from circular flow of income).

How does capitalism improve inequality

Income inequality can incentivise people to take risks- improves economy by ↑ investment which leads to an outward shift in AD. This will ↑ derived demand for labour, ↑ employment for low income ppl. This will lead to greater output + improved living standards for everyone.

-more competition can decrease prices

How can capitalism create inequality

Business owners can decide their own income/ wages. So they can decide to pay themselves higher wages. And they can pay their workers smaller wages. This leads to income inequality.

Creates winners + losers: some people can invest their money and make big profit. Some people can invest their money and lose all of it(if it fails, e.g. due to failed investment). Mixed economies can close the gaps between winners and losers, by providing public goods like school for the losers, and taxing the rich for the winners.